Markets Take Japan’s Banks for a Ride

Japanese banks are having a bad day. First, the yield on Japanese government bonds spiked on Thursday morning, pushing prices on the banks’ trillions of yen in bond holdings down. Then, their shares were walloped — the Tokyo Stock Exchange’s bank-share index plummeted 9.4% — as stock investors began to worry that those massive JGB portfolios could become a liability if prices continue to fall.

Reuters

A pedestrian stands in front of a stock board in Tokyo.

Blame it on the Bank of Japan.

Since early April, the central bank has been buying roughly twice the amount of JGBs as it had before — part of an aggressive new easing push that’s aimed at eventually revving up investment and spending in the long-stagnant Japanese economy. That’s roiled the normally quiet JGB market, whose slowly sinking yields and climbing prices provided a reliable source of trading profits during the past few years for the country’s biggest banks, as profits from loans dwindled.

Indeed, part of the BOJ’s stated aim is to drive investors like banks out of JGBs so that they can put their money to better uses.

The change has led Japan’s three largest lenders — whose bond-trading desks helped produce sterling results during the last fiscal year ended March, to slash profit outlooks for the current fiscal year and cast around for other ways of making money, as well as strategies to control the risk of paper losses on bond holdings.

“This year’s big challenge will be to lower the weight of our markets division and raise that of our customer-facing divisions,” said Mizuho Financial Group Inc.'s chief executive Yasuhiro Sato, at an investors’ presentation on Wednesday. Mizuho made around 220 billion yen last year from JGB trading on its 30 trillion yen portfolio; it expects that to shrink by 120 billion yen this year.

What’s more, for every percentage point rise in JGB yields, Mizuho expects to see paper losses of 100 billion yen to 200 billion yen, Mr. Sato said during an earnings press conference last week.

Last month, the bank started up a special risk-monitoring committee — which meets monthly and is attended by top executives — to keep an eye on the potential impacts of things like the anticipated interest-rate rise.

Japan’s two other mega-lenders are in a similar position.

Mitsubishi UFJ Financial Group Inc., the biggest JGB holder with 48 trillion yen worth of bonds, expects its bond trading profits to fall by around 200 billion yen this year, from 337 billion yen last year. But MUFG’s President Nobuyuki Hirano, said the bank would still be a “stable holder” of government debt.

Sumitomo Mitsui Financial Group Inc. said it had already started shifting away from JGBs during the past year, trimming holdings to 26 trillion yen by the end of March from 28 trillion yen a year earlier.

About Japan Real Time

Japan Real Time is a newsy, concise guide to what works, what doesn’t and why in the one-time poster child for Asian development, as it struggles to keep pace with faster-growing neighbors while competing with Europe for Michelin-rated restaurants. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, the site provides an inside track on business, politics and lifestyle in Japan as it comes to terms with being overtaken by China as the world’s second-biggest economy. You can contact the editors at japanrealtime@wsj.com